The rate of return earned on a bond given the price paid and the cash flows actually received by the investor

A bond that sells below its par or face value. A bond sells at a discount when the market rate of interest is above the bond's fixed coupon rate.

The curve representing bonds' price/yield relationship is convex. Therefore, convexity is the adjustment for the shape of the curve in the formula for estimating the percentage change in the price of the bond corresponding to a given change in the market interest rate.

A bond that is selling at its par value

A bond whose market value is above its par or face value. A bond sells at a premium when the market rate of interest is below the bond's fixed coupon rate.

The periodic interest payments in a bond contract

The calculation of future value based on the assumption that all interest earned will be reinvested to earn additional interest

The lender in a bond contract

The expected return on a bond at the end of a relevant holding period based on predictions made from interest rate forecasts

The risk that the borrower will not pay back all or part of the interest or principal as specified in the loan agreement

The worth in the future of a currently held amount of money if it is invested and reinvested at known interest rates

The percentage change in bond price for a given change in yield

A measure of interest rate risk (or bond price volatility) that considers both coupon rate and maturity; it is the weighted average of the number of years until the present value of each of the bond's cash flows is received.

The length of time until the final payment of a debt security

A plot of a bond's price (y-axis) versus its market yield (x-axis)

The discount rate that equates the present value of all cash flows from a bond (interest payments plus principal) to the market price of the bond

A concept based on the belief that people have a positive time preference for consumption, preferring to consume goods today rather than consume similar goods in the future; therefore, a dollar today is worth more than a dollar received at some future date

The calculation for finding the present value of some future sum of money

The borrower in a bond contract

The amount of coupon payments received in a year stated as a percentage of the face value

The risk resulting from market interest rate changes that cause a bond investor to have to reinvest coupon payments at interest rates different from the bond's promised yield

Bonds that have no coupon payment but promise a single payment at maturity

A contractual obligation of a borrower to make cash payments to a lender for a fixed number of years; upon maturity, the lender is paid the face value of the security